Dollar makes up some ground against rivals

But greenback still on track to post sharp quarterly falls vs. yen, euro

By

WilliamL. Watts

LisaTwaronite

SAN FRANCISCO (MarketWatch) -- The dollar bounced back from earlier losses against most major rivals Monday, after a short-lived sell-off early in the session, but was still on track for steep quarterly losses against both the yen and the euro.

A stronger-than-expected surge in inflation in the euro zone muted the effects of a small bounce after the slightly better-than-expected Chicago Purchasing Managers Index.

Dollar sentiment didn't get much help from U.S. Treasury Secretary Henry Paulson, who defended his regulatory blueprint, saying initial reviews that the plan amounted to less oversight of Wall Street are incorrect. See full story.

"Hotter-than-expected euro zone inflation data weighed on the U.S. dollar as did a sense of disappointment over the Treasury Department's outline for new U.S. financial market regulations," wrote currency analysts at Action Economics.

The Chicago PMI showed business activity in the Chicago region continued to contract in March, but the contraction was less severe than in February, according to a survey of corporate purchasing managers released Friday. The index was at 48.2% in March compared with 44.5% in February. Readings under 50% indicate overall business contraction.

On Wall Street, U.S. stock indexes climbed Monday, but equities chalked up their worst quarter in more than five years. See Market Snapshot.

The dollar-selling "ran its course into the London close, however, and the U.S. dollar managed a fairly decent recovery, helped a bit by firming U.S. equities, and a better than expected Chicago PMI report," the Action Economics analysts said.

The euro was last buying $1.5784, down from an earlier session high of $1.5893 -- just a few ticks away from its record high of $1.5903. For the quarter, the European unit was on track to gain 8.2% against the greenback. See real-time currency prices.

The pound sterling was trading at $1.9846, after earlier rising as high as $1.9978. For the quarter, the pound slipped 0.1%.

The dollar bought 99.64 yen, up from a session low of 98.94 yen earlier. In the first three months of the year, the dollar lost about 11.1% against the yen.

The dollar index, which measures the greenback against a basket of currencies, was at 71.749, up from 71.650 earlier and down about 6.6% for the quarter.

Meanwhile, Turkey's stocks and currency fell sharply on Monday, battered by a much weaker-than-expected report on GDP growth in the fourth quarter as well as heightened political concerns. The Turkish currency, the lira, was also battered on Monday. The lira tumbled 2.6% against the euro and 2% against the U.S. dollar. See Emerging Markets Report.

Hot euro-zone inflation

The dollar traded in a narrow range overnight and in European activity.

Setting the foreign-exchange tone, Eurostat said consumer price inflation across the 15 nations that make up the euro zone rose at an annual rate of 3.5% in March, accelerating from 3.3% in February.

The "flash" estimate from the statistics agency is a preliminary reading that offers no detailed breakdown of price pressures. Market expectations had been for a reading near the February level.

The pace of inflation remains well above the European Central Bank's medium-term cap of 2%. With central bank officials emphasizing preservation of price stability, economists say prospects for interest-rate cuts to fend off euro-zone sluggishness remain on hold.

"There had been hopes that inflation might stabilize around the 3.3% level and then start to come down in future months as some more helpful base effects come through," said David Brown, chief European economist at Bear Stearns. "But, with food and energy prices still very firm, the overshooting of the ECB's 2% target is likely to be greater and go on for longer."

Meanwhile, European Commission data showed that consumer confidence remained stable in March, with a consumer confidence index unchanged at negative 12. The industrial confidence gauge was unchanged at zero, while the retail confidence measure was unchanged at a reading of one.

In addition, the data showed sentiment in the services sector declined to nine from a February reading of 10. Amid ongoing financial turmoil, confidence in the financial-services sector plunged to 12 in March from a February reading of 28 -- the lowest reading since the survey began in April 2006.

'Balancing act'

Sterling was on the defensive in London trading after slipping last week on heightened expectations that the Bank of England could move as early as April to trim its key interest rate, which now stands at 5.25%.

Bank of England Gov. Mervyn King on Monday said the bank's monetary policymakers face a difficult "balancing act" in attempting to meet its inflation target of 2%.

"We are not aiming for inflation below 2%, but at 2%," King said in a speech delivered at the Bank of Israel in Jerusalem, referring to the Bank of England's inflation target.

While "some slowdown" is likely needed to bring inflation down toward the target, "we cannot allow the economy to slow too sharply, lest a margin of spare capacity is produced that pulls inflation down below the target next year," King said.

At same time, "once higher inflation becomes entrenched, it may be costly to dislodge," he said.

Looking ahead, market participants said the focus is largely on upcoming U.S. data and events, including closely watched index from the Institute for Supply Management Tuesday as well as eagerly awaited data on U.S. employment for March, due out Friday.

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